2025-04-04T10:23:16.000Z

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The stock market experienced a dramatic downturn on what was referred to as ‘Liberation Day’, with the S&P 500 index falling by an alarming 4.84%. This decline marked it as the 23rd largest drop since at least the year 2000, surpassing even the decline that followed the infamous bankruptcy of Lehman Brothers in 2008. Such a substantial drop raises immediate concerns about the resilience of the market and investor sentiment.

As investors across Asia and Europe and even the futures market in the United States indicated, the outlook for the following trading day appeared bleak. Wall Street analysts, often viewed as the cautious guardians of market sentiment, also seemed to be bracing for another day of negative trading. Their typically cautious tones have now turned somber as they grapple with the implications of the current market climate.

Despite the prevailing negativity, retail traders displayed an intriguing characteristic reminiscent of Pavlov's dogs, having been conditioned over the years to buy the dip during market downturns. This phenomenon was evident as retail investors rushed to purchase stocks aggressively on this turbulent day. According to reports from JPMorgan’s equities team, retail investors ended the day with net buying of $4.7 billion, marking the highest level of net buying in a decade. This surge was significantly above the $4.4 billion average seen over the past year, suggesting a robust commitment from retail traders even in the face of substantial losses.

On this particular day, retail investors aggressively bought shares around 11 AM when the market experienced a brief dip, later selling as the market began to recover. Notably, the inflows of capital were well-balanced between exchange-traded funds (ETFs) and single stocks, with $2.4 billion going into ETFs and $2.3 billion into individual stocks. Initially, the investment spread across a variety of companies, but as the day progressed, it concentrated on retail favorites, which are typically viewed as longer-term investments.

Interestingly, the behavior of retail investors in this downturn starkly contrasts with their actions during the COVID-19 sell-off in 2020. Back then, retail traders often exacerbated the selling pressure initiated by institutional investors, showing a 75% correlation between their trading activity and the broader market's performance. During that period, their strategy leaned more towards diversified ETF investments rather than individual stock picks, resulting in a high ratio of ETF-to-single stock purchases.

However, in a surprising twist, retail traders opted to sell Tesla shares on this day, despite it being a favored stock for buying the dip in 2025. Notably, Tesla was the only stock among the Magnificent Seven (Mag7) that faced net selling, raising questions about changing perceptions among retail investors regarding this once-beloved stock.

Despite the impressive record of $4.7 billion in net buying by retail investors, this surge was insufficient to counteract the overwhelming selling pressure from institutional investors. Analysts at JPMorgan noted that leveraged ETFs alone might have offloaded approximately $22 billion worth of stocks during the closing auction of the U.S. stock market. Moreover, further selling is anticipated as various investment strategies that link net exposure to volatility are likely to trigger additional dumps of capital. JPMorgan estimates that up to $20 billion could be sold by volatility-targeting investors in the following days.

In terms of overall performance, retail traders have not fared well recently. JPMorgan estimates that they are collectively down nearly 13% in 2025, a stark contrast to the S&P 500's 8.3% decline. The catastrophic losses experienced in 2022 did not deter the buy-the-dip mentality among these traders, but if current trends continue, a shift in their approach may become inevitable.

For those interested in more insights into the stock market's emotional toll, one might consider the image of a stock trader with their head in their hands, which captures the essence of the current market anxiety.